Yazaki Bulgaria Ltd is active in the automotive industry and is part of the Japanese Yazaki Group. It had used the transactional net margin method (TNMM) to demonstrate that prices for the sale of products to related parties were at arm’s length. Following an audit, the tax authorities found that the company’s profit was outside the arm’s length range and issued an assessment of additional income for FY2014-2016. According to the tax authorities, Yazaki Bulgaria Ltd had not included all its costs when calculating its profit margin. Administrative Court Judgement The Administrative Court annulled the tax authority’s assessment and ruled in favour of Yazaki Bulgaria Ltd. Excerpt “It is undisputed in this case that the adjustments made by the appellant for comparability with the amounts of additional labour costs in individual years are as follows: For 2014, the reported operating loss of £2,192,845.67 was adjusted upwards to a net profit of £4,837,402.79 as a result of the elimination for comparability purposes of costs of £7,030,248. 46 leva; before adjustments a net profit margin of -1.02% is calculated and after adjustments the net profit margin indicator is +2.34% and falls above the lower quartile value which is 2.27; For 2015 – the reported net profit from operations of £4,086,310.44 has been adjusted upwards to a net profit of £11,832,352.26 as a result of eliminating for comparability purposes expenses of £7,746,041. 82 leva; before adjustments, the net profit margin is calculated at 1.43% and after adjustments, the net profit margin indicator is 4.26% and falls above the lower quartile value of 1.68%; for 2016 – the reported net profit from operations of £1,259,468.30 has been adjusted upwards to a net profit of £6,815,444.19 as a result of eliminating for comparability purposes expenses of £5,555,975. 89; Before adjustments, the net profit margin is calculated at 0.46% and after adjustments, the net profit margin indicator is 2.56% and falls above the lower quartile value which is 2.22% . In summary of the foregoing, the court finds that after the audited entity’s elimination of net profit comparability expenses, Y.B.’s net profit margin indicator falls within the interquartile range, and therefore, the conclusion that the company’s net profit margin indicator is below market values is not warranted. The adjustments made were to eliminate the effect of additional staff and training costs which affected the auditee’s net profit margin and, in the Court’s view, were consistent with the purpose of Article 4 N-9 of 14.08.2006 – to achieve a result that would have been achieved in an ordinary commercial or financial relationship between independent persons under comparable conditions. The additional costs have been recognized by the tax administration as actually incurred and are part of the costs taken into account in the declared financial result of the company. There is no basis for transformation of the financial result of the company, as done by the audit on the basis of Art, Article 16 and Article 78 of the Income Tax Act, since the net profit of the company falls within the market values when adjustments are made for comparability, i.e. there is no conduct on the part of the audited entity aimed at tax evasion. For the reasons set out above, the Court considers that the appeal should be upheld by annulling the contested revision act.” Click here for English Translation Click here for other translation ...

Following an audit of “Tin Cup Ltd” for FY 2016 and 2017 an assessment was issued by the tax authorities regarding excessive amounts of waste materials and pricing of intra-group transactions. On the issue of excessive amounts of waste materials, tax deductions was denied by the authorities as the costs was not considered to have been held in the interest of the company, i.e. it did not take place with the purpose of increasing “Tin Cup Ltd” income. On the second issue, the tax authorities found that the most appropriate method for the transactions in question (sales to a related party) was the CUP method. Applying the CUP to the controlled transactions (instead of the TNMM) resulted in additional income of approximately 392.000 EUR in total for FY 2016 and 2017. A complaint was filed by “Tin Cup Ltd” with the Dispute Resolution Board. Decision of the Board The Board upheld the assessment of the tax authorities both in regards of denied deductions of costs related to excessive waste materials and in regards of the transfer pricing adjustment. Excerpts Issue of excessive waste materials “The applicant further submits that the audit is not entitled to disallow the excess consumption for tax purposes, since it is a real amount, which can only be considered to be in the interest of the undertaking, since the processing of the raw material results in the products to be sold. Since, however, the applicant’s above individual allegation is well-founded only to the extent that the purchases of raw and auxiliary materials are made within reasonable and expected limits and taking as a reference technical specifications and the data of common experience. Because in the present case, the products for which a difference was calculated show overruns of consumptions from 8,43% to 53,96% in excess of the normal consumption according to the accounting records. Because as it follows from the relevant Audit Report, the audit established with full and clear arguments that the excessive consumption of raw and auxiliary materials, which affected the cost of sales and the net results, did not take place in the interest of the company, i.e. it did not take place with the purpose of increasing its income and therefore, the condition of para. (a’) of Article 22 of Law 4172/2013. The applicant’s claim is therefore rejected as unfounded.” Issue of transfer pricing “…Because, as is clear from the relevant Audit Report (pp. 28-35), the audit provides full and sufficient reasons for the rejection of the applicant’s documentation, namely: · the sample of external comparables selected by the applicant concerns EU-28 countries, whereas the transaction at issue is between two Greek undertakings and the geographical area is a factor which materially affects the comparability of the transactions. · the audit preferred the comparable uncontrolled price (CUP) method, not only because it is the preferred traditional method in accordance with the above provisions, but also because it found that internal comparables with independent/unrelated companies existed. · the transactional net margin method (TNMM) has the disadvantage that the net profits taken into account are affected by factors not related to intra-group transactions, such as extraordinary income and expenses, thus reducing its reliability (OECD Guidelines 2017, para. 2.70 and 2.72). Indeed, in the present case, specifically in the 2016 tax year, the applicant incurred extraordinary expenses of €1.5 million, with the result that the net profit margin ratio is approximately half of what it would have been without them. Because the applicant also claims that there is a comparability deficit in the sample of the audit, since the way and time of payment of the sales invoices differs. In particular, unlike other independent/unrelated customers, which have open balances for a significant period of time, the related company………..normally advances 50 % of the annual turnover from the previous year. Since, however, because of this preferential method of collection, the applicant incurs significant amounts of interest payable to the abovementioned affiliated company, amounting to: · 2016: 200.121,00 € · 2017: 103.000,00 €, transaction which has also been documented and contributes to the elimination of any difference in comparability. Since the methodology and the conclusion of the audit, as reflected in the relevant Audit Report, are hereby found to be valid, acceptable and fully justified. The applicant’s claim is therefore rejected as unfounded. Click here for English translation Click here for other translation ...

The Danish tax authorities had issued a discretionary assessment of the taxable income of Tetra Pak Processing Systems A/S due to inadequate transfer pricing documentation and continuous losses. Judgement of the Supreme Court The Supreme Court found that the TP documentation provided by the company did not comply to the required standards. The TP documentation did state how prices between Tetra Pak and the sales companies had been determined and did not contain a comparability analysis, as required under the current § 3 B, para. 5 of the Tax Control Act and section 6 of the Danish administrative ordinance regarding transfer pricing documentation. Against this background, the Supreme Court found that the TP documentation was deficient to such an extent that it had to be equated with missing documentation. The Supreme Court agreed that Tetra Pak’s taxable income for FY 2005-2009 could be determined on a discretionary basis. According to the Supreme Court Tetra Pak had not proved that the tax authorities’ discretionary assessments were based on an incorrect or deficient basis, or that the assessment had led to a clearly unreasonable result. Hence, there was no basis for setting aside the assessment. The Supreme Court therefore upheld the prior High Court’s decision. In the decision reference is made to OECD 2010 Transfer Pricing Guidelines Importance of Transfer Pricing documentation and comparability analysis: Para 1.6, 2.22, 2.23, 2.78, 3.1, 3.22 and 5.17 Choice of tested party: Para 3.18 Exceptional and extraordinary costs and calculation of net profit indicator/profit level indicator: Para 2.80 Click here for translation ...

Second, it will be necessary to consider how exceptional, non-recurring operating costs arising as a result of COVID-19 should be allocated between associated parties.19 These costs should be allocated based on an assessment of how independent enterprises under comparable circumstances operate. Separately, as extraordinary costs may be recognised as either operating or non-operating items, comparability adjustments may be necessary to improve the reliability of a comparability analysis. It is important to keep in mind that the treatment in a transfer pricing analysis of “exceptional,” “non-recurring,” or “extraordinary” costs incurred as a result of the pandemic will not be dictated by the label applied to such costs, but by an accurate delineation of the transaction, an analysis of the risks assumed by the parties to the intercompany transaction, an understanding of how independent enterprises may reflect such costs in arm’s length prices, and ultimately how such costs may impact prices charged in transactions between the associated enterprises (see OECD TPG paragraph 2.86, for example). Financial accounting standards should be considered in the comparability study, as they contain relevant and potentially helpful concepts in identifying the nature of costs. However, it should also be noted that even under those financial accounting concepts, there can be uncertainty as to whether particular costs are properly characterised as exceptional or extraordinary costs. 19 Depending on the duration of COVID-19 and the broader effects of the pandemic, the question may arise what constitutes an “exceptional, non-recurring” operating cost and when should such costs no longer be considered “exceptional” or “non-recurring”. As the effects of the pandemic vary by industry, business model or market, it is likely that this question can only be answered through a careful analysis of the specific costs under consideration ...